Whether sporting a beachfront view or nestled in a mountainside perch, your vacation home is a place where special moments happen and important memories are made – a place where your family comes together. But, if you’re not careful, the gift of a vacation home can be a source of conflict for those who inherit it, even spurring battles between family members. One of the best ways to avoid family discord is to plan, and plan early.
It’s crucial to ask the right questions when deciding how to pass on your property. Who wants it and – an important follow-up – who can maintain it and keep up with insurance and taxes? How do you make things equal if more than one sibling is interested? If disagreements come up, what then? Should your beneficiaries sell the home, or perhaps buy each other out? What are the terms of use during your lifetime and even after?
Here are four estate planning strategies to consider as it concerns your vacation home:
1) Outright Transfers
The simplest way to pass your vacation home on is to leave it outright in your will to specific children or family members. While this is the simplest option for you, it may lead to headaches and conflict for your loved ones. The added complexities that come with an outright transfer often spark disagreements and resentment between those who receive the property. Equal ownership means all owners have an equal responsibility to pay for associated costs, and each has a say in decisions concerning the home. Who can use it and when? Should it be sold and for what price? What projects should be invested in to fix it up? These questions and more can lead to contention between family members, and conflicts are not always easily resolved.
2) Family Limited Liability Company
An LLC can offer tax advantages while providing you with greater control over the property, even after shares are given to your children. You serve as the manager of the LLC, enabling you to pass ownership of the home to the LLC itself, and then transfer shares to individual family members. Those included in the LLC create a detailed operating agreement specifying who has access to the home and when, as well as who is responsible for taxes, upkeep and other expenses.
3) Gift to Qualified Personal Residence Trust (QPRT)
QPRTs allow you to transfer your property and continue to live there for a specified number of years, while avoiding federal estate taxes and mitigating federal gift taxes. You continue to pay the carrying costs of the home, including real estate taxes. At the end of the term, the property passes outright to those named as your remainder beneficiaries with no estate tax.
4) Gift to Grantor Trust
This irrevocable trust owns the assets held by it for transfer tax and state law purposes, but the assets are treated as owned by you, the individual grantor, for income tax purposes. No loss or gain is recognized during the sale of an asset by a grantor to a grantor trust. The trust structure also can provide rules regarding sharing use and expenses among your loved ones.
Decisions of this nature are not always easy and answers are typically not formed overnight but it is vitally important to plan ahead. It is possible to incorporate your vacation home into your estate plan in a way that works for everyone. The Price Group can help as you decide what to do with a home that has long served as a place of connection for you and the ones you love.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their two daughters and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
Content Is Nothing Without Context
Are you looking for a weekly financial market commentary that provides context? Sign up to receive our weekly commentary HERE. We are helping make the complex simple.